Working Paper: CEPR ID: DP8095
Authors: Pamela Bombarda; Fergal McCann; Farid Toubal
Abstract: Business services firms are increasingly under pressure from foreign competition. We develop an oligopolistic competition model that studies the effect of trade liberalization on exit and sectoral restructuring in the business services sector. We assume that firms are heterogeneous in their marginal costs, allowing the model to predict domestic M&A and exit by closedown, as well as foreign M&A. The model is brought to detailed French firm-level data on exit and M&A in the business services sector. The empirical analysis confirms that due to greater import penetration, French service firms exit by closedown and by M&A. Contrary to previous findings for manufacturing, we show that imports from high-income countries cause the majority of this exit, helping to inform the ongoing debate regarding the dangers of services trade liberalization.
Keywords: services; trade; exit; import competition; oligopoly; firm-level data
JEL Codes: F1; L1; L8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| import penetration (K24) | likelihood of firm exit through closedown (G33) |
| import penetration (K24) | likelihood of firm exit through M&A (G34) |
| import penetration (K24) | foreign M&A (F23) |
| import penetration (K24) | domestic M&A (G34) |
| import penetration from OECD countries (O56) | reallocative effect (D61) |